Electronic -Banking in Ethiopia- Practices, Opportunities and Challenges

By Gardachew Worku, Lecturer of Accounting and Finance, Gondar University,

Ethiopia Contact address: gard_worku@yahoo.com Key words: e-banking in Ethiopia;
e-commerce in Ethiopia; Opportunities and challenges of e-banking in Ethiopia; e-
cards; Banking practice in Ethiopia.

Abstract The paper examines the practices, opportunities and challenges of E-

banking services in Ethiopia. Ethiopian banking system is still underdeveloped
compared to the rest of the world. In Ethiopia Cash is still the most dominant
medium of exchange and electronic payment systems are at an embryonic stage.
Commercial Bank of Ethiopia (CBE), despite, being the pioneer in introducing
ATM based payment system; it lagged behind private commercial bank, Dashen
Bank, which worked aggressively to maintain its lead in electronic payment
systems. At the end of June 2009, Dashen bank has installed more than 40 ATMs
in its area branches, university compounds, shopping malls, restaurants and hotels
and has maintained its leadership in introducing and expanding e-banking in
Ethiopia. Low level of infrastructural development, lack of suitable legal and
regulatory framework, high rates of illiteracy, frequent power interruption and
security issues are the main challenges for developing e-banking in Ethiopia. All
banks in Ethiopia are too late to move with technological advancement. In order to
promote and develop viable e-banking in Ethiopia, they should clearly chart out the
time schedule for their integration and technological advancement.

Introduction Information technology is considered as the key driver for the changes
taking place around the world. Due to a pervasive and steadily growth of
information and communication technology, the world banking industry is entering
into new phenomena of unprecedented form of competition supported by modern
information and communication infrastructure (C.S.V Murthy, 2004). The
evolution of e-banking started from the use of Automatic Teller Machines (ATMs)
and Finland is the first country in the world to have taken a lead in ebanking
(Mishra, R. and J. Kiranmai (2009). Electronic banking has been widely used in
developed countries and is rapidly expanding in developing countries. However,
the slow diffusion of e-commerce to African countries has been attributed to a
number of issues some of which may be unique to the African continent (Darley,
W. K, 2001). Electronic banking (e-banking) is nothing but e-business in banking
industry. It may also be referred as internet banking. The computer applications are
paramount concern to the banks in today’s business environment and Internet has
become the major platform for all financial, banking and commercial

transactions in the present scenario (Magembe, B A S and Shemi A P (2002). The

paperless banking has become inevitable. Electronic commerce has empowered the
financial markets, by virtue of providing information on a finger tip and settling
the payments in the same way (C.S.V Murthy, 2004). The rapidly growing
information and communication technology is knocking the front-door of every
organization in the world, where Ethiopian banks would never be exceptional. In
Ethiopia, however, cash is still the most dominant medium of exchange, and
electronic payment systems are at an embryonic stage. In the face of rapid
expansion of electronic payment systems throughout the developed and the
developing world, Ethiopia’s financial sector cannot remain an exception in
expanding the use of the system. While Ebanking has improved efficiency and
convenience, it has also posed several challenges to the regulators and supervisors
(Uppal R. and Rimpi Jatana, 2007). Thus this study is conducted with the
following objectives.

Objective s of the study

• To describe and differentiate between different e-banking techniques

• To conduct a survey on the existing operating style of banks in Ethiopia.

• To analyze the status of electronic banking in Ethiopia

• To investigate the main challenges and opportunities for e-banking in Ethiopia.

• To recommend appropriate actions to be taken to promote e-banking in Ethiopia.

Methodology: This piece of survey and descriptive study is conducted primarily by

using secondary data. Some primary data were collected through on site
observation; and interview with customers and branch managers of both private
and public banks was held. The secondary sources are the annual and quarterly
reports of the banks. News papers and literatures have also been consulted.

Types, Benefits and Features of Electronic payment methods

Types

The traditional payment system with money as a medium of settlement has been
replaced by cheques and drafts and further development in the filed has been with
the advent of electronic cards. The most commonly used electronic cards include
ATM cards, Debit cards, Credit cards and Smart cards.

ATM card is a kind of plastic card which allows a cardholder to withdraw money
form his bank account through automated teller machine. This card can be used
also for other banking services like deposit and transfer to any other account by
using the ATM machine. Credit card is the modern electronic plastic card that may
be used repeatedly to borrow money or buy products and services on credit. VISA,
Master Card, American Express and Discover are commonly known and widely
used credit cards through out the world. The decision with which card to go
depends on the comparison of the features of the specific card (not the brand). The
most important features, of course, are Interest rate and Annual fees. (C.S.V
Murthy, 2004) Debit cards are electronic plastic cards directly tied to bank account
and the amount of money the cardholder can spend with it is limited to the amount
of money he/she has in the bank. It is called debit card because when cardholder
uses a debit card, the transaction debits (withdraws) the amount of the transaction
from cardholders’ account, usually on the same d
Benefits of e-cards

According to C.S.V Murthy, (2004), E-cards offer a number of benefits to the

issuing banks and customers of the bank including:

• Dramatically reduce printing, mailing, and financial handling costs associated

with processing transaction.

• Enhance payment security by minimizing theft or loss.

• Reduce undeliverable payments via electronic delivery to the card account.

• Prevent fraud through automated controls

• Increase customer satisfaction and enhance service to constituents.

• Ensure continuity of service to cardholders in emergency or disaster situations

• Improve operational efficiency and profitability of the issuing banks.

Review of Commercial Banking practices in Ethiopia

In Ethiopia nine private and three state owned banks are operating at the end of
June 2009. Despite a rapid increase in the number of financial institutions since
financial liberalization, the Ethiopian banking system is still underdeveloped
compared to the rest of the world. Cash is still the most dominant medium of
exchange. The use of checks is mostly limited to government institutions, NGOs
and some private businesses. Commercial banks in Ethiopia provide the same
services with the same operational style that they used to offer before decades. The
common banking functions provided by public and private banks in Ethiopia are
deposit mobilization, credit allocation, money transfer and safe custody. Banks in
Ethiopia are unable to improve customer service, design flexible and customized
products, and differentiate themselves in amarket where product features are easily
cloned. Ethiopian banking is unable to come from long way of being sleepy to a
high proactive and dynamic entity. The customers of Ethiopian commercial banks
have missed to enjoy with the technological advancement in banking sector which
has been entertained elsewhere in Africa and the rest of the world. The modern
ebanking methods like ATMs, Debit cards, Credit cards, Tele banking, Internet
banking, Mobile banking and others are new to the Ethiopian banking sector. E-
banking which refers to the use of modern technology that allows customers to
access banking services electronically whether it is to withdraw cash, transfer
funds, to pay bills, or to obtain commercial information and advices are not known
in Ethiopia. In Ethiopia it is impossible to withdraw money with out presenting the
pass book and money transfer is allowed only in between branches of the same
bank. However, from the public and the economy there is a strong need for
strengthening linkages among banks in order to allow healthy flow of financial
resources among financial institutions and optimize the contributions of the entire
financial system to the development processes as whole. The Ethiopian banking
industry as a whole has a net work of 521 branches at the end of the fiscal period
ended in June 2008, which is the lowest compared to the size of the country
(1.1milion square km) and number of population (78 million) and this shows that
the number of population being served by a single branch stood at around 149,
712. With such highly scattered branch network and disintegrated working system
it is hard to ensure efficient flow of financial resources and optimize the
contributions of the entire financial system to the development processes. All
banks in Ethiopia are too late to move with technological advancement and they
should clearly chart out the time schedule for their integration and technological
advancement. Some of the banks even today do not have information websites
which can help them to provide at least the information on financial services
offered by them. Every bank customer is highly dissatisfied by the disappointing
status of financial development in Ethiopia. Even the time wasted in traveling for
search of bank branches and the long waiting time to access the account is really
disappointing. This is particularly because of the non-integration of branches of the
same bank, i.e. even with in individual banks their branches are not linked to each
other and it is a must for the customer to physically visit the branch in which an
account has been opened

E-banking Practice in Ethiopian Commercial banks

Certainly the banking industry in Ethiopia is underdeveloped and therefore, there is
an all immediate need to embark on capacity building arrangements and modernize
the banking system by employing the state of the art technology being used any
where in the world. With a growing number of import-export businesses, and
increased international trades and international relations, the current banking
system is short of providing efficient and dependable services and therefore all
banks operating in Ethiopia should recognize the need for introducing electronic
banking system to satisfy their customers and meet the requirements of rapidly
expanding domestic and international trades, and increasing international banking
services. Undeniably the largest state-owned bank, Commercial Bank of Ethiopia,
is the pioneer in introducing ATM service for local users in 2001 with its fleet of
eight ATMs located in Addis Ababa. Moreover, CBE has had Visa membership
since November 14, 2005. However, due to lack of appropriate infrastructure, it
failed to reap the fruit of its membership. Despite, being the pioneer in introducing
ATM based payment system and acquired Visa membership, CBE lagged behind
Dashen Bank, which worked aggressively to maintain its lead in electronic
payment systems. Dashen bank, a forerunner in introducing e-banking in Ethiopia,
has installed ATMs at convenient locations for its own cardholders. The Dashen
Bank ATM is available 24 hours a day, seven days a week and 365 days a year
providing service to Dashen Debit Cardholders and International Visa Cardholders
coming to the country. At the end of June 2009, Dashen bank has installed more
than 40 ATMs in its area branches, university compounds, shopping malls,
restaurants and hotels. Available services on Dashen Bank ATMs are, cash
withdrawal, balance Inquiry, mini-statement, fund transfer between accounts
attached to a single card and PIN (Personal Identification Number) change.

Currently, the bank gives debit service only for Visa cards. Dashen bank clients
can withdraw up to 3,000 birr in cash and can buy goods and services of up to
5,000 birr a day. As of June 30, 2009, Dashen Visa card holders have reached
54,624. Expanding its leadership, Dashen Bank has begun accepting MasterCard in
addition to Visa credit cards it began serving over two years ago. Dashen won the
membership license from MasterCard in 2008. Moreover, harnessing its leadership
with advanced banking technology, Dashen Bank signed an agreement with iVeri,
a South African electronic payment technology company, for the introduction of
mobile commerce in April 21, 2009. According to the agreement, iVeri Payment
Technologies has licensed its Gateway and MiCard e-payment processing solution
to Dashen Bank. This would make Dashen Bank the first bank in Ethiopia to
acquire e-commerce and mobile merchant transactions. The younger United Bank
is the first to introduce tele-banking - including text messages (SMS) - by the end
of 2008.Wegagen Bank has signed an agreement with Technology Associates
(TA), a Kenyan based IT firm, for the development of the solutions for the
payment system and installation of a network of ATMs on December 30, 2008,

The memorandum of understanding signed by three private commercial banks to

launch an Automated Teller Machine (ATM) and Point of Sale terminal (POS)
network, in February 2009 is welcoming strategy to improve electronic card
payment system in Ethiopia. Three private commercial banks - Awash
International Bank S.C., Nib International Bank S.C and United Bank S.C. – have
agreed in principle to establish an ATM network called Fettan ATM network. If
everything goes as planned, Fettan ATM will install over 140 ATM

machines and over 340 POSs across Ethiopia. There will be one ATM at every
branch of the consortium banks, all domestic airports serviced by commercial
service, shopping complexes and merchants. The agreement is the first significant
cooperation between competing banks in Ethiopia, which others should be
encouraged to follow as there is no single bank in Ethiopia that can afford to
provide extensive geographical coverage and access (Binyam Tamene, 2009). The
first ever electronic banking gateway was signed between Ethiopian Commodity
Exchange (ECX) and Dashen Bank and CBE. The electronic banking system being
developed with both banks is designed to give a secure electronic data sharing
gateway between clients, banks and ECX, facilitating a smooth transaction (Abiy
Demilew, 2008) As the CBE continues to move at a snail's pace in its turnkey
solution for Card Based Payment System, Dashen Bank remains so far the sole
player in the field of electronic banking since 2006. The agreements signed by
other private banks to introduce e-banking are welcoming and further steps
towards realizing those agreements should be taken.

Opportunities for E-banking development in Ethiopia

• Opportunities offered by ICT through e-learning programs. The School Net
program introduced in Ethiopia to connect more than 500 Schools creates
opportunities to citizens to be familiar with ICT applications and increases the
awareness of the public (Yayehyirad Kitaw, 2006).

• Late adopter opportunities:

• UNECA, World Bank and UNCTAD are helping developing countries to design
national strategies, including e-commerce, via National Information and
Communication Infrastructure plans (UNCTAD, 2004).

• Commitment of the governments: The Ethiopian government considers ICT as

an indispensable tool to alleviate poverty and facilitate a state-transformation
aiming an effective and efficient service delivery. It has initiated commendable
ICT policy frameworks and several E-Government projects, including the Woreda
NET Project (ITU4D, 2006).

E-banking challenges in Ethiopia Banking

in Ethiopia faces numerous challenges to fully adopt and adapt E-Banking

applications and seize the opportunities presented by ICT applications in general.
Key Challenges for E-Banking applications are:

• Low level of internet penetration and poorly developed telecommunication

infrastructure: Lack of infrastructure for telecommunications, Internet and online
payments impede smooth development and improvements in e-commerce in
Ethiopia. Most rural areas of the country, where the majority 7of small and
medium businesses are concentrated, have no Internet facilities and thus are unable
to engage in e-commerce activities.

•Lack of suitable legal and regulatory framework for e-commerce and e-payment:
Ethiopian current laws do not accommodate electronic contracts and signatures.
Ethiopia has not yet enacted legislation that deals with e-commerce concerns
including enforceability of the validity of electron contracts, digital signatures and
restrict the use of encryption technologies.
•Political instabilities in neighboring countries: Political and economic instabilities
in Somalia, Southern Sudan, and Eritrea are threatening traits that do not provide a
very conducive environment for e-banking in Ethiopia. Political instabilities
inevitably disturb smooth operations of business and free flow of goods and
services

•High rates of illiteracy: Low literacy rate is a serious impediment for the adoption
of E-Banking in Ethiopia as it hinders the accessibility of banking services. For
citizens to fully enjoy the benefitsof E-Banking, they should not only know how to
read and write but also possessbasic ICT literacy.

•High cost of Internet: The cost of Internet access relativeto per capita income is a
critical factor. Compared to the developed countries, there arehigher costs of entry
into the e-commerce market in Ethiopia. Theseinclude high start-up investment
costs,high costs of computers and telecommunication and licensing requirements

•Absence of financial networks that links different banks (Banks are not yet
automated): Most of the banking-transactions currently taking place use credit and
debitcards supplied by Visa and MasterCard. For conducting e-banking, the use of
credit or debit cardsis mandatory thus requiringthe need for specialized
systemswhich are not currently available.

•Frequent power interruption: Lack of reliable power supply is a key challenge for
smoothly running e-banking in Ethiopia.

•Resistance to changes in technology among customers and staff due to:

Lack of awareness on the benefits of new technologies,

Fear of risk,

Lack of trained personnel in key organizations,

Tendency to be content with the existing structures,

People may be resistant to new payment mechanisms

•Cyber security issues: Cyber security is a global challenge that requires global
and multi-dimensional response with respect to policy, socio-economic, legal and
technological aspects. E-banking applications represent a security challenge as
they highly depend on critical ICT systems that create vulnerabilities in financial
institutions, businesses and potentially harm banking customers. It is imperative
for banks to understand and address security concerns in order to leverage the
potentials of ICTs in delivering E-banking applications. In the deployment of
Ebanking application, attention should be drawn to the prevention of cyber crime
(i.e. the use of ICTs by individuals to commit fraud and other crimes against
banking transactions) (ITU4D, 2006).

Conclusions and Recommendations

Information technology is considered as the key driver for the changes taking place
around the world. Due to a pervasive and steadily growth of information and
communication technology, the world banking industry is entering into new
phenomena of unprecedented form of competition supported by modern
information and communication infrastructure. The Ethiopian banking system is
very much behind compared to the rest of the world. Cash is still the most
dominant medium of exchange. Even the use of checks is mostly limited to
government institutions, NGOs and some private business. ATM, Credit Card and
debit card services, and other electronic payment systems are at rudimentary stage.
Low level of infrastructural development, lack of suitable legal and regulatory
framework, inadequate banking system, high rates of illiteracy, resistance to
changes in technology among customers and staff, frequent power interruption and
security issues are the main challenges for developing e-banking in Ethiopia. In
order to promote and develop viable e-banking in Ethiopia the following
recommendations are forwarded:

• Banks should invest in automating their banking system and it is imperative to

devise strategies that involve alliances and collaborations between and amongst
private and public banks. Such alliances and collaborations would enhance e-
banking initiatives in Ethiopia.
• Current laws don’t accommodate e-contracts and e-signatures and hence a
comprehensive regulatory and legal framework for e-banking and e-commerce
should be developed.

• Public awareness on the use of ICT, e-commerce and e-Payment need to be

raised. • Provide incentives for financial institutions to invest rigorously on ICT
and use of e-commerce and e-Payment.

• Ongoing efforts by ETC to expand ICT infrastructure should be encouraged.

• The government should consider the liberalization of the telecom industry to

enhance efficiency and competition within the sector.

• The government should consider the liberalization of the financial sector for
foreign bank entry to enhance the introduction of modern technology in the
banking sector.

• Frequent connectivity failure in telephone line and electricity should be

drastically improved.

References

Abiy D., 2008, March, 17), Capital, weekly news paper, Addis Ababa

Binyam T., (2009, February, 20), Daily Monitor, Addis Ababa

C.S.V. Murthy 92004) “E-commerce, Concepts, models and Strategies(ed),

Himalya Publishing House, Mumbai.
Darley, W. K., The Internet and Emerging E-commerce: Challenges and
Implications for Management in Sub-Saharan Africa Journal of Global Information
Technology Management Vol. 4 No. 4 2001

ITU (2006) “Cyber security guide for developing countries, ITU, Geneva, 2006
ITU4D (2006), the National ICT for Development

(ICT4D), Five Years Action Plan for Ethiopia [2006-2010], Ministry of Capacity
Building, Addis Abeba, 2006

Magembe, S and Shemi A P (2002). Challenges and opportunities for adopting

Electronic commerce in a developing country: The Botswana Perspective. IAABD
Conference proceedings, Port Elizabeth 2002.

Mishra R and J. Kiranmai (2009) “E-Banking: A Case of India”, The Icfai

University Journal of Public Administration, Vol. 5, No. 1, pp. 55-65, 2009.

UNCTAD (2004), E-commerce and Development Report. New York and Geneva:
UNCTAD

Uppal, R. and Rimpi Jatana, (2007) “E-banking in India – Challenges and

opportunities (ed). ISBN: 8177081373, PP. 266.

Yayehyirad Kitaw (2006) “E-Government in Africa, Prospects, challenges and

practices”

Annual report of Ethiopian Private Banks (2007/8 and 2008/9).

Annual and Quarterly report of Commercial bank of Ethiopia (2006/7 and 2007/8)